HomeMy WebLinkAbout2019-06-18; City Council; ; Consideration of City Council Policy No. 86 - Pension Funding and City Council Policy No. 87 -General Fund Surplus, and a Revision to City Council Policy No. 74-General FCA Review VJC,.
� CITY COUNCIL � Staff Report
Meeting Date:
To:
From:
Staff Contact:
Subject:
June 18, 2019
Mayor and City Council
Scott Chadwick, City Manager
Laura Rocha, Deputy City Manager, Administrative Services
laura.rocha@carlsbadca.gov or 760-602-2415
Consideration of City Council Policy No. 86 - Pension Funding and City
Council Policy No. 87 -General Fund Surplus, and a Revision to City Council
Policy No. 74-General Fund Reserve Policy.
Recommended Action
Adopt a Resolution approving City Council Policy No. 86 to establish a Pension Funding Policy,
approving City Council Policy No. 87 to establish a General Fund Surplus Policy, and revising City
Council Policy No. 74, General Fund Reserve Policy.
Executive Summary
Financial policies are central to a strategic, long-term approach to financial management.
Institutionalizing good financial management practices promotes stability and continuity. They
define a shared understanding of how an organization will develop its financial practices and
manage its resources to provide the best value to the community.
An adopted set of City Council financial management policies that are consistently followed will
assist the city in achieving its current and future goals in a fiscally responsible and sustainable
manner. These policies establish guidelines for developing, funding, and monitoring the city's
defined pension benefits administered through Cal PERS, the use of General Fund surplus in a
given operating year, and an appropriate minimum level of General Fund reserves.
Discussion
Pension Funding Policy -City Council Policy No. 86
The city provides defined benefit retirement benefits through the California Public Employees'
Retirement System (CalPERS). CalPERS is a multiple-employer public employee defined benefit
pension plan. Adhering to a pension funding policy that embodies funding and accounting
principles is a prudent governance practice and helps achieve intergenerational equity among
those who financially support the plan. It also ensures that resources are available to fulfill the
city's contractual promises to its employees and minimizes the chance that funding of these
benefits will interfere with the city's ability to provide essential services to the public. Please
see Attachment A to the resolution titled City Council Policy No. 86 -Pension Funding Policy.
General Fund Surplus Policy -City Council Policy No. 87
Due to various factors including economic expansion, frugal operations, or changes to various
projects and programs, the city may end a fiscal year with a surplus of revenues over
June 18, 2019 Item #6 Page 1 of 15
expenditures, encumbrances and commitments. Surplus funds are those funds that result after
closing the city's accounting records as defined by the results of the annual fiscal year audit. A
General Fund surplus policy is a prudent governance practice to support other financial
management policies allowing the city to meet its reserve policies and avoid or reduce its long-
term liabilities, such as pension costs. Please see Attachment B to the resolution titled City
Council Policy No. 87 -General Fund Surplus Policy.
General Fund Reserve Policy -City Council Policy No. 74 Revised
A key attribute of a financially stable organization is appropriate reserves. Strong reserves
position an organization to weather significant economic downturns more effectively; manage
the consequences of outside agency actions that may result in revenue reductions; and address
unexpected emergencies, such as natural disasters, catastrophic events caused by human
activity, or excessive liabilities or legal judgments against the organization. A General Fund
reserve policy serves as policy framework to deploy city resources to meet the city's financial
commitments and address unexpected future events in a fiscally prudent manner. The
proposed revised Policy No. 74 supercedes Policy No. 74, dated Nov. 30, 2010 (Exhibit 2). Please
see Attachment C to the resolution titled City Council Policy No. 74 -General Fund Reserve
Policy.
Fiscal Analysis
While there is no immediate fiscal impact to adopting and revising these financial management
policies, financial management policies are central to a strategic, long-term approach to
financial management. Institutionalizing good financial management practices promotes
stability and continuity. They define a shared understanding of how an organization will
develop its financial practices and manage its resources to provide the best value to the
community.
Next Steps
The new and revised financial management policies will be implemented by staff.
Environmental Evaluation (CEQA)
This action is not a "project" under the California Environmental Quality Act (CEQA) per State
CEQA Guidelines Section 15378(b)(4) as it is a government fiscal activity which does not involve
any commitment to any specific project which may result in a potentially significant physical
impact on the environment.
Public Notification and Outreach
This item was noticed in accordance with The Ralph M. Brown Act and was available for viewing
at least 72 hours prior to the meeting date.
Exhibits
1. City Council Resolution
2. Council Policy No. 74 Dated 11/30/10
June 18, 2019 Item #6 Page 2 of 15
Exhibit 1
RESOLUTION NO. 2019-099
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF CARLSBAD,
CALIFORNIA, APPROVING CITY COUNCIL POLICY NO. 86 TO ESTABLISH A
PENSION FUNDING POLICY AND REVISING CITY COUNCIL POLICY NO. 74,
GENERAL FUND RESERVE POLICY.
WHEREAS, the City Council of the City of Carlsbad, California believes financial policies
are central to a strategic, long-term approach to financial management; and
WHEREAS, the City Council desires to establish a pension funding policy to help ensure
resources are available to fulfill the city's contractual promises to its employees and minimize the
chance that funding pension benefits will interfere with the city's ability to provide essential services
to the public; and
WHEREAS, the City Council previously revised Council Policy No. 74, concerning General
Fund reserve guidelines, on November 30, 2010; and
WHEREAS, the City Council desires to revise Council Policy No. 74 to help ensure the city
can meet its financial commitments and address unexpected future events in a fiscally prudent manner.
NOW, THEREFORE, BE IT RESOLVED by the City Council ofthe City of Carlsbad, California,
as follows:
1. That the above recitations are true and correct.
2. That the City Council hereby approves the new City Council Policy No. 86 titled
Pension Funding Policy as shown in Attachment A.
3. That the City Council hereby approves the revised existing City Council Policy No.
74 titled General Fund Reserve Policy as shown in Attachment C.
June 18, 2019 Item #6 Page 3 of 15
PASSED, APPROVED AND ADOPTED at a Regular Meeting of the City Council of the City of
Carlsbad on the 18th day of June, 2019, by the following vote, to wit:
AYES:
NAYS:
ABSENT:
Hall, Blackburn, Bhat-Patel, Schumacher, Hamilton.
None.
None.
ATTEST:
~~Co~
BARBAENGlESON, City Clerk
(SEAL)
June 18, 2019 Item #6 Page 4 of 15
{cityof
Carlsbad
Policy No.
Date Issued:
Effective Date:
Attachment A
86
Resolution No.
Cancellation Date: N/ A
Supersedes No. N/ A
Council Policy Statement
Category: FINANCIAL MANAGEMENT POLICIES
Specific Subject: Pension Funding Policy
PURPOSE:
The purpose of this policy is to provide reasonable assurance that the costs of the city's defined
benefit pension plans will be funded in an equitable and sustainable manner. It codifies the city's
commitment to fund these benefits based on regular actuarial valuations, and to measure and report
them in accordance with generally accepted accounting principles (GAAP). Adhering to a funding
policy that embodies these funding and accounting principles is a prudent governance practice, and
helps achieve intergenerational equity among those who financially support the plan. It also ensures
that resources are available to fulfill the city's contractual promises to its employees, and minimizes
the chance that funding of these benefits will interfere with the city's ability to provide essential
services to the public.
BACKGROUND:
The city provides "defined benefit" retirement benefits through the California Public Employees'
Retirement System (CalPERS). CalPERS is a multiple-employer public employee defined benefit
pension plan.
All full-time, certain part-time, and all city safety employees are eligible to participate in CalPERS.
CalPERS provides retirement and disability benefits, annual cost of living adjustments, and death
benefits to plan members and their beneficiaries. Benefits are based on years of credited service,
equal to one year of full time employment. Cal PERS acts as a common investment and administrative
agent for participating public entities within the State of California. Benefit provisions and all other
requirements are established by State of California statute and city resolution.
Pension Funding: A Guide for Elected Officials, issued by eleven national groups including the U.S.
Conference of Mayors, the International City/County Management Association, and the Government
Finance Officers Association, established the following five general policy objectives for a pension
funding policy:
1. Actuarially Determined Contributions -a pension funding plan should be based
upon an actuarially determined contribution (ADC) that incorporates both the cost
of benefits in the current year and the amortization of the plan's unfunded actuarial
accrued liability.
2. Funding Discipline -a commitment to make timely, actuarially determined
Page 1 of 3
06-18-201906-18-2019
2019-099
June 18, 2019 Item #6 Page 5 of 15
Policy No. 86
contributions to the retirement system is needed to ensure that sufficient assets are
available for all current and future retirees.
3. Intergenerational equity -annual contributions should be reasonably related to the
expected and actual cost of each year of service, so the cost of employee benefits
is paid by the generation of taxpayers who receives services from those employees.
4. Contributions as a stable percentage of payroll -contributions should be
managed so that employer costs remain consistent as a percentage of payroll over
time.
5. Accountability and transparency -clear reporting of pension funding should
include an assessment of whether, how, and when the plan sponsor will ensure
sufficient assets are available for all current and future retirees.
The financial objective of a defined benefit pension plan is to fund the long-term cost of benefits
provided to the plan participants. To assure that the plan is financially sustainable, the plan should
accumulate adequate resources in a systematic and disciplined manner over the active service life of
benefitting employees. This funding policy outlines the method the city will utilize to determine its
actuarially determined contributions to fund the long-term cost of benefits to the plan participants
and annuitants.
POLICY:
To achieve the purpose of this policy, the city will take the following actions:
1. The city will use the actuarially determined contribution (ADC) provided by CalPERS annually
to serve as the basis for its pension contributions. The ADC will include the normal cost for
current service (variable cost) and the amortization of any unfunded amount (fixed cost). The
normal cost will be calculated using the entry age normal cost method using economic and
non-economic assumptions approved by the Cal PERS Board of Administration.
2. The city will review the CalPERS annual actuarial valuations to validate the completeness and
accuracy of the member census data and the reasonableness of the actuarial assumptions.
3. The city supports a policy of funding the full amount of the actuarially determined
contribution each year and making the full contribution as determined by CalPERS. In the
event the city is unable to fund the full amount of the actuarially determined contribution in
each year with current resources (i.e., without borrowing or using reserves), the deputy city
manager, administrative services, or designee, will identify a reasonable period to return to
full funding.
4. The city will commit to a combined (both the city's miscellaneous and safety plans) pension
funded ratio of no less than a minimum of 80%, with a target funded ratio range of 80% to
85%. For the purposes of this policy, the term "funded ratio" refers to the level of the
pension plans assets, at market value, in proportion to the pension plans accrued liability.
This is an annual point-in-time measure, as of the valuation date.
Page 2 of 3
June 18, 2019 Item #6 Page 6 of 15
Policy No. 86
5. In the event the city is unable to meet the minimum combined pension funded ratio of 80%
with current resources (i.e., without borrowing or using reserves), the finance director or
deputy city manager of administrative services will identify a reasonable period to return to a
minimum 80% funded ratio status.
6. The city will demonstrate accountability and transparency by communicating all information
necessary for assessing the city's progress toward meeting its pension funding objectives.
This will be achieved, in part, by ensuring full and accurate implementation of Governmental
Accounting Standards Board No. 68, effective fiscal year 2014-15.
7. As part of the annual budget adoption process, the city manager or deputy city manager of
administrative services will report to the City Council on the following:
a. most recent actuarially determined pension contribution
b. most recent actuarially funded ratio and its compliance with either #4 or #5 above
c. any other significant issues associated with funding the defined benefit pension in a
stable and equitable manner as described above.
8. Staff will monitor changes to and expansions of pension funding best practices, as well as any
additional guidance provided by the Government Finance Officers Association that relate to
the funding of defined benefit pensions. Staff will return to City Council with modifications to
this policy as needed.
Page 3 of 3
June 18, 2019 Item #6 Page 7 of 15
{cityof
Carlsbad
Council Policy Statement
Category: FINANCIAL MANAGEMENT POLICIES
Specific Subject: General Fund Surplus Policy
PURPOSE:
Policy No.
Date Issued :
Effective Date:
Resolution No.
Attachment B
87
05-21-2019
05-21-2019
Cancellation Date: N/A
Supersedes No. N/A
To establish a City Council policy for the use of surplus funds resulting from unrestricted General Fund
actual revenues exceeding total actual expenditures, encumbrances, and commitments for a given
fiscal year.
BACKGROUND:
Due to various factors including economic expansion, responsible operations, or changes to various
projects and programs, the City of Carlsbad (city) may end a fiscal year with a surplus of revenues over
expenditures, encumbrances and commitments. Surplus funds are those funds that result after
closing the city's accounting records as defined by the results of the annual fiscal year audit.
It is the intent of the city to use all surplus funds generated to meet reserve policies, and the
avoidance or reduction of long term liabilities. The city will not use year-end surplus funds to fund
ongoing operations unless approved by City Council.
From time to time, the city manager may recommend to the City Council the use of surplus funds
consistent with the uses identified in this policy.
POLICY:
To achieve the purpose of this policy, the city will take the following actions:
1. The city will use surplus funds to replenish any General Fund reserve deficiencies up to the
minimum level as set forth in the City Council General Fund Reserve Policy.
2. One-time funds, such as grant proceeds, will be used for one-time expenditures; therefore, the
City Council may not use one-time revenues and surplus funds in a way that creates new on-going
expenditure requirements, unless the City Council can demonstrate that adequate resources exist
to support the on-going expenditure requirements.
3. The city manager is authorized to approve the carry forward of any unspent and unencumbered
budget for a particular item equal to or less than $100,000 into the following fiscal year. These
items will be one-time expenditures and not for on-going services, programs or personnel.
Page 1 of2
June 18, 2019 Item #6 Page 8 of 15
Policy No. 87
4. Any remaining surplus funds in excess of reserve deficiencies and items equal to or less than
$100,000 shall be allocated as follows:
a. Roughly fifty percent {50%) of the surplus funds shall be used to address long-term
obligations such as pension liabilities, other post-employment benefits, bonded debt,
lease obligations and other long-term needs. Unlike ongoing needs such as salaries, long-
term needs do not require ongoing funding over an indefinable period.
b. Roughly fifty percent {50%) of the surplus funds shall be used to fund innovation projects
or programs, guided by a philosophy that these one-time expenditures shall seek to
improve or enhance city operations to better support the city's community values and
quality of life.
5. The city manager may recommend the use of surplus funds for City Council approval, to address
unforeseen and non-recurring circumstances of fiscal concern, including, but not limited to:
a. Sudden and unexpected significant facility or infrastructure failures that pose safety risk
to staff or the community;
b. Declaration of a State of Emergency by the Governor;
c. Unanticipated expenditures resulting from legislative changes to State/Federal programs
or regulations in the current fiscal year;
d. Acts of Terrorism declared by the Governor or the President of the United States;
e. Acts of Nature which are infrequent in occurrence;
f. Other catastrophic events which are infrequent in occurrence.
Page 2 of2
June 18, 2019 Item #6 Page 9 of 15
{cityof
Carlsbad
Council Policy Statement
Category: FINANCIAL MANAGEMENT POLICIES
Specific Subject: General Fund Reserve Policy
PURPOSE:
Policy No.
Date Issued:
Effective Date:
Resolution No.
Cancellation Date:
Supersedes No.
Attachment C
74
N/A
11-30-2010
The purpose of this policy is to establish a target minimum level of designated reserves in the General
Fund to:
• Reduce the risk of financial impacts resulting from a natural disaster or other catastrophic
events;
• Respond to the challenges of a changing economic environment, including prolonged
downturns in the local, state, or national economy; and
• Demonstrate continued prudent fiscal management and creditworthiness.
This policy also sets forth guidelines for replenishing deficiencies and will describe both how such
replenishment is to be funded, and the period over which the replenishment it to occur.
BACKGROUND:
A key attribute of a financially stable organization is appropriate reserves. Strong reserves, often
referred to as fund balances in governmental funds, position an organization to weather significant
economic downturns more effectively; manage the consequences of outside agency actions that may
result in revenue reductions; and address unexpected emergencies, such as natural disasters,
catastrophic events caused by human activity, or excessive liabilities or legal judgments against the
organization. A reserve policy serves as policy framework to deploy city resources to meet the city's
financial commitments and address unexpected future events in a fiscally prudent manner.
The Government Finance Officers Association (GFOA), an international organization that promotes
the professional management of governments for public interest, recommends maintaining at least
two months of operating expenditures or 15% reserves. According to the GFOA, the methodology
used to create the reserves depends on the circumstances of the individual organizations. Reserves
are typically assessed based on a city's unique circumstances or risk levels, and operating
expenditures are generally the basis for such reserve.
The General Fund is the main operating fund that pays for general services provided by the city, such
as public safety, parks, and library services. The General Fund accounts for all general revenues of the
city not specifically levied or collected for other city funds, and for expenditures related to the
delivery of the city's general services.
Page 1 of3
2019-099
06-18-2019
06-18-2019
June 18, 2019 Item #6 Page 10 of 15
Policy No. 74
The city endeavors to maintain adequate reserves for its General Fund as a matter of fiscal prudence
and sound financial management. Establishing and maintaining General Fund reserves will guide the
city in:
• Planning for contingencies and unexpected events;
• Maintaining good standing with credit rating agencies;
• Ensuring cash availability when revenue is unavailable; and
• Deciding when to use reserves and how to replenish reserves if they have been spent.
As a general budget principle concerning use of reserves, the City Council decides whether or not to
appropriate funds from reserves. Reserve funds will not be spent for any function other than the
specific purpose of the reserve account from which they are drawn without specific direction in the
annual budget; or by a separate City Council action.
Per current Governmental Accounting Standards No. 54 (GASB 54), issued by the Governmental
Accounting Standards Board, fund balances are divided into five classifications in the financial
statements:
Classification Nature of Restriction
Non-Spendable Cannot be readily converted to cash or cannot be legally spent
Externally imposed (by granting agencies, governmental
Restricted entities, etc.) restrictions on spending
City Council formally-imposed (by resolution or other action)
Committed restrictions on spending
Funds reserved by City Council direction for designated
Assigned purposes
Unassigned Residual balance not classified in any of the above categories
These five classifications are applicable only to governmental funds, which includes the General Fund,
and are intended to identify the extent to which fund balance (or a reserve) is constrained by special
restrictions, if any. The city commits to preparing financial reports which accurately categorize fund
balance in compliance with GASB 54. Fund balance levels are a crucial consideration in long-term
financial planning.
POLICY:
For purposes of this policy, the term "reserve" refers to any unassigned fund balance in compliance
with GASB 54. It is the policy of the City of Carlsbad to maintain reserves for unforeseen emergencies
or catastrophic impacts, and for significant changes to the economic environment.
The city commits to maintaining General Fund reserves at a minimum of 30% of General Fund annual
operating expenditures. These reserves shall be comprised of two separate reserves and will be
considered together when calculating the total General Fund reserve balance. The total reserve level
will be calculated using the prior fiscal years adopted General Fund budgeted expenditures.
Reserves will be evaluated annually in conjunction with the development of the city's annual
operating budget process. Staff recommendations will be made to City Council annually on the
available funds and the appropriate reserve levels.
Page 2 of 3
June 18, 2019 Item #6 Page 11 of 15
Policy No. 74
Emergency/Catastrophic Reserve. Funds reserved under this category will be maintained for the
purpose of sustaining General Fund operations in the case of a public emergency such as a natural
disaster or other unforeseen catastrophic event. The Emergency Reserve will not be accessed to
meet operating shortfalls or to fund new programs or personnel. This reserve may be expended only
if an event is determined to be a public emergency by majority vote of the City Council, when such
expenditures are necessary to ensure the safety of the city's residents and their property. In the event
this reserve is reduced below the amount established by this policy, the City Manager or designee
shall promptly prepare a plan as conditions warrant to replenish the Emergency/Catastrophic Reserve
balance to the policy level.
The Emergency/Catastrophic Reserve shall be maintained at a level equal to 25% of prior year's
annual General Fund expenditures for purposes of this calculation.
Economic Contingency/Stability Reserve. Funds reserved under this category shall be used to
mitigate, should they occur, unanticipated budgeted revenue shortfalls (actual revenues less than
projected revenues) due to changes in the economic environment, and/or significant operating
budget deficiencies as a result of certain economic triggers. Examples of "economic triggers" include,
but are not limited to:
• Significant decrease in property tax, sales tax, transient occupancy tax, or other economically
sensitive revenues;
• Loss of businesses considered to be significant sales tax generators;
• Reductions in revenue due to actions by the state/federal government;
• Economic downturns or significant increases in inflation;
• Other circumstances deemed necessary by the City Council to meet the claims and obligations
of the city.
The City Manager or designee shall promptly prepare a plan as conditions warrant to replenish the
Economic Contingency/Stability Reserve balance to the policy level.
The Economic Contingency/Stability Reserve shall be maintained at a level equal to 10% of prior year's
annual General Fund revenues for purposes of this calculation.
For purposes of calculating the total General Fund reserve level, these two reserve levels together
(Emergency/Catastrophic Reserve and the Economic Contingency/Stability Reserve), after being
individually calculated, shall be no less than a minimum of 30% of prior year's adopted General Fund
budgeted expenditures.
At the discretion of the City Council, reserve levels in excess of the 30% minimum requirement, may
be used for one-time opportunity cost purposes. For example, one-time expenditures resulting in
future efficiencies, infrastructure, special projects, or key economic development opportunities that
provide savings or efficiencies where no funding source otherwise exists. These types of one-time
opportunity costs may only be authorized by formal City Council action where findings have been
made as to what constitutes the savings or how efficiencies will be achieved.
Page 3 of3
June 18, 2019 Item #6 Page 12 of 15
CITY OF CARLSBAD
COUNCIL POLICY STATEMENT
DATED: March 7, 2008
Subject: General Fund Reserve Guidelines
Exhibit 2
Policy No.
Date of Issue:
Page
1 of 3
74 ---
11/30/10
Effective Date 11 / 3 0 11 0
Cancellation Date
Supersedes No. 4 / 15 / 0 8
~-----·--------
Copies to: City Council, City Manager, City Attorney, Department Heads and Division
Heads, Employee Bulletin Boards, Press, File
PURPOSE:
To provide guidelines to the City Council and staff for establishing, maintaining and the annual review
of a minimum and target General Fund reserve for the City of Carlsbad.
BACKGROUND:
Establishing a minimum General Fund reserve is a mechanism that governments can implement to
help insure adequate levels of fund balance are available to help mitigate current and future risks. A
minimum General Fund reserve is generally considered a prudent and conservative fiscal policy to
deal with unforeseen situations. Some examples of unforeseen situations include, but are not limited
to:
• Unfunded Legislative or Judicial Mandates
• Economic Downturns or Increases in Inflation
• Reduced Revenues
• Federal/State/County Budget Cuts
• One-Time City Council Approved Expenditures
• Natural Disasters
The Government Finance Officers Association (GFOA), an international organization that promotes
· the professional management of governments for the public interest, recommends maintaining a
minimum unreserved fund balance in the General Fund of no less than 5 to 15 percent of regular
General Fund Operating Revenues or no less than two months or 17% of General Fund Operating
Expenditures. According to the GFOA, the methodology used to create the reserve depends on the
circumstances of the individual organizations. The GFOA also recommends the establishment of a
formal written policy on the level of unreserved fund balance that should be maintained in the General
Fund.
According to a recent survey, most cities choose General Fund Operating Expenditures as the basis
for a reserve . Typically there is less fluctuation and risk in forecasting future expenditures. The
General Fund Operating Expenditures methodology is also typically considered the more
conservative basis for establishing a General Fund reserve.
June 18, 2019 Item #6 Page 13 of 15
CITY OF CARLSBAD
COUNCIL POLICY STATEMENT
DATED: March 7, 2008
Subject: General Fund Reserve Guidelines
Exhibit 2
Policy No.
Page
2 of 3
74
Dateoflssue 11_[.J0/lQ
Effective Date 11 / 3 0 I 10
Cancellation Date ---
Supersedes No. 4/15/08
Copies to: City Council, City Manager, City Attorney, Department Heads and Division
Heads, Employee Bulletin Boards, Press, File
There are additional benefits to establishing a minimum General Fund reserve. Credit rating agencies
carefully monitor levels of fund balance and unreserved fund balance in a government's General
Fund to evaluate a government's continued creditworthiness. Finally, fund balance levels are a
crucial consideration in long-term financial planning.
POLICY:
For purposes of this policy, the term "reserve" includes undesignated, unreserved fund balance.
It is the policy of the City of Carlsbad to maintain a minimum reserve for unforeseen emergencies or
catastrophic impacts upon the City, and whenever fiscally possible and financially prudent to maintain
a greater target reserve. The minimum reserve of the General Fund balance would be 30% of
General Fund Operating Expenditures and the target reserve would be a range of 40% to 50% of
General Fund Operating Expenditures.
The minimum reserve may be used for cash flow needs necessitated by unforeseen emergencies,
while reserves in excess of the minimum will be used only for one-time uses associated with
unexpected events, such as economic downturns or temporary reductions in revenues. In general,
General Fund reserves will be used for one-time uses only.
The reserve level, which includes undesignated fund balance, will be calculated using the prior fiscal
year's Adopted General Fund Budgeted expenditures. Reserves would be evaluated annually in
conjunction with the development of the City's 10 Year Financial Forecast and Annual Operating
Budget process. Staff recommendations will be made to City Council annually on the available funds
and the appropriate reserve levels. If the General Fund balance should ever drop below the minimum
reserve level, a plan would be developed to return the General Fund back to the minimum reserve
level.
June 18, 2019 Item #6 Page 14 of 15
.-----------------------------------------·
CITY OF CARLSBAD
COUNCIL POLICY STATEMENT
DATED: March 7, 2008
Subject: General Fund Reserve Guidelines
Exhibit 2
Policy No.
Page
3 of 3
74
Date of Issue: 11 / 3 0 / 10
Effective Date: 11 /30/10
Cancellation Date: ---
Supersedes No. 4/15/08
Copies to: City Council, City Manager, City Attorney, Department Heads and Division
Heads, Employee Bulletin Boards, Press, File
The minimum and target undesignated and unreserved General Fund balances are intended to be a
prudent and conservative fiscal policy which should help contribute to the fiscal security of the City .
. The reserve levels can be changed or used for specific purposes at the discretion of the City Council.
There is no maximum unreserved General Fund balance and any reasonable additional reserve
above the minimum reserve would provide a greater level of fiscal security.
June 18, 2019 Item #6 Page 15 of 15
FINANCIAL MANAGEMENT
POLICIES
Item #6
Laura Rocha, Deputy City Manager, Administrative Services
June 18, 2019
PURPOSE
•To consider City Council Policy No. 86 -Pension
Funding and City Council Policy No. 87 -General
Fund Surplus, and a Revision to City Council
Policy No. 74 -General Fund Reserve Policy.
PENSION POLICY
Purpose of Policy:
–Provide reasonable assurance that the costs of the city’s
defined benefit pension plans will be funded in an equitable
and sustainable manner.
–Ensures that resources will be available to fulfill the city’s
contractual promises to its employees, and minimizes the
chance that funding of the benefits will interfere with the city’s
ability to provide essential services to the public.
PENSION POLICY
Policy objectives:
–Actuarially Determined Contributions (ADC)
–Funding Discipline
–Intergenerational Equity
–Contributions as a stable percentage of payroll
–Accountability and Transparency
PENSION POLICY
Policy actions:
–ADC provided by CalPERS annually to serve as basis for
pension contributions.
–City will review CalPERS annual actuarial reports to validate
completeness and reasonableness.
–Support a policy of funding the full amount of the
determined contribution each year.
PENSION POLICY
Policy actions, (cont.)
–City will commit to a combined pension funded ratio of no less
than a minimum of 80%.
–City will demonstrate accountability and transparency by
communicating and reporting all information necessary for
assessing city’s progress toward meeting funding objectives.
–City will monitor all changes to and expansion of pension
funding best practices.
7
WHAT ARE THE CITY’S PENSION ASSETS AND LIABILITIES?
TOTAL MISCELLANEOUS -All Plans
as of June 30, 2017 *
Actuarial Accrued Liability -$363,173,103
Unfunded Liability
$93,362,695
74.29% Funded
• CalPERs most recent available data
Assets
~ $269,810,408
TOTAL SAFETY -All Plans
as of June 30, 2017 *
Actuarial Accrued Liability -$284,296,297
Unfunded Liability
$78,575,315 \
72.36% Funded
* CalPERS most recent available data
Assets
$205,720,952
$7,696,221
$10,342,213
FY 2016-17
$18,038,434
CITY'S PROJECTED MINIMUM REQUIRED PENSION COSTS
FY 2017-18
$19,706,281
9.25%
FY 2018-19
$20,504,044
4.05%
FY 2019-20
$20,345,844
-0. 77%
$10,340,355
$11,823,593
FY 2020-21
$22,163,948
8.94%
..
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CARLSBAD’S ACTIONS
FY Action Taken
17-18 Paid $11 million to reduce unfunded
liability (Misc. Plan)
16-17 Paid $9 million to reduce unfunded
liability (split between both plans)
15-16 Established $10 million Pension
Stabilization Fund
12-13 Established 2nd Tier at 2% @ 60
PROPOSED ACTION FOR FY 2018-19
Payment to CalPERS to reduce unfunded
liability (both plans) using available one-time
funds from:
GF excess reserves -$ 10.0M
Pension set-aside -$ 5.5M
FY 2018-19 budget surplus -$ 4.5M
Summary of Payment Options
Option #1 Option #2 Option #3
Payment to CalPERS to reduce UAL $20M $17.3M $12.2M
Interest Savings (over 14-17 years)$11.3M $9.5M $6.2M
Annual Budget Savings beg. FY 2020-21 $2.2M $1.9M $1.4M
Projected Combined Pension Funding Ratio*~80%~78%~77%
*Projected using CalPERS assumptions at 6.30.17
GENERAL FUND SURPLUS POLICY
Purpose of Policy:
•To establish the use of surplus funds resulting
from unrestricted General Fund actual revenues
exceeding total actual expenditures,
encumbrances, and commitments for a given
fiscal year.
GENERAL FUND SURPLUS*
LAST FIVE FISCAL YEARS
FY 2013-14 FY 2014-15 FY 2015-16 FY 2016-17(1)FY 2017-18(2)
Budgeted Surplus $ 1,337,495 $ 4,344,380 $ 2,467,351 $ 4,376,374 $ 7,739,840
Actual Surplus 6,660,623 17,357,258 14,894,568 (22,036,326)7,668,897
Difference $ 5,323,128 $ 13,012,878 $ 12,427,217 $ (26,412,700)$ (70,943)
*Surplus is calculated on a modified accrual basis for comparison purposes only.
(1) Includes a transfer of $10.5M to fund Fire Station No. 2 CIP project and a payment of $14.8M of golf
course bonds.
(2) Includes additional CalPERS payments of
$11M.
GENERAL FUND SURPLUS POLICY
Policy actions:
–City will use surplus funds to replenish any GF reserve deficiencies up to the minimum level as set forth in the GF Reserve Policy.
–One-time funds will be used for one-time expenditures.
–City manager is authorized to approve carry forwards of any unspent and unencumbered budget for items equal to or less than $100,000 into the following year.
GENERAL FUND SURPLUS POLICY
Policy actions (cont.)
–Remaining surplus funds in excess of reserve deficiencies and approved carry forwards shall be allocated as follow:
•50% to address long-term obligations such as pension liabilities, bonded debt, or other long-term needs.
•50% to fund new technology or major upgrades, new innovation projects providing better services to the community, as well as programs associated with the Connected Carlsbad Roadmap.
–Monetary needs for these items can be substantial and take several years to implement.
GENERAL FUND SURPLUS POLICY EXAMPLES
Have Met Reserve
Policy & Not Pension
Policy Requirements
Have Not Met Reserve
Policy & Met Pension
Policy Requirements
GF Annual Surplus - non-GAAP basis $ 7,668,897 $ 7,668,897
Addition to Reserves, if deficient -(5,000,000)
50% Additional CalPERS, if deficient (3,834,449)-
50% Transfer to Innovation Fund (3,834,449)(1,334,449)
Increase to Unassigned Reserves $ -$ 1,334,449
GENERAL FUND SURPLUS POLICY
Policy actions (cont.)
•City Manager may recommend the use of surplus for City Council approval, to address unforeseen and non-recurring circumstances of fiscal concern.
•City will demonstrate accountability and transparency by communicating and reporting all information necessary for assessing city’s progress toward meeting policy objectives.
GENERAL FUND RESERVE POLICY -Revised
Purpose of Policy:
Establish a target minimum level of designated reserves in the General Fund (GF) to:
–Reduce the risk of financial impacts resulting from a natural disaster or other catastrophic events;
–Respond to the challenges of a changing economic environment, including prolonged downturns in the local, state, or national economy; and
–Demonstrate continued prudent fiscal management and creditworthiness.
GENERAL FUND RESERVE POLICY -Revised
Policy Objectives:
•Planning for contingencies and unexpected events;
•Maintaining good standing with credit rating agencies;
•Ensuring cash availability when revenue is unavailable;
and
•Deciding when to use reserves and how to replenish reserves if they have been spent.
GENERAL FUND RESERVE POLICY -Revised
Classification Nature of Restriction
Non-Spendable Cannot be readily converted to cash or cannot be legally spent
Restricted Externally imposed (by granting agencies, governmental entities, etc.)
restrictions on spending
Committed City Council formally-imposed (by resolution or other action) restrictions on
spending
Assigned Funds reserved by City Council direction for designated purposes
Unassigned Residual balance not classified in any of the above categories
GENERAL FUND RESERVE POLICY -Revised
Unassigned Reserves shall be allocated and calculated as follows:
–Emergency/Catastrophic Reserve -for sustaining operations in the case of a
public emergency such as a natural disaster or other unforeseen catastrophic
event.
»25% of prior year’s annual budgeted GF expenditures
–Economic Contingency/Stability Reserve –for unanticipated revenue shortfalls
due to changes in the economic environment, and/or significant operating
budget deficiencies as a result of certain economic triggers.
»10% of prior year’s annual budgeted GF revenues
GENERAL FUND RESERVE POLICY -Revised
Unassigned Reserves shall be allocated and calculated as follows:
•Both reserve levels (Emergency/Catastrophic Reserve and the
Economic Contingency/Stability Reserve), after being individually
calculated, shall be no less than a minimum of 30% of prior year’s
adopted GF budgeted expenditures.
•Reserves in excess of the 30% minimum requirement may be used
for one-time opportunity cost purposes at the discretion of the
City Council.
GENERAL FUND RESERVES (CURRENT POLICY)
Fund Balance Reserves at June 30, 2018
Non-spendable $51,627,000
Assigned *43,855,000
Unassigned**84,485,000
Total General Fund Reserves $179,967,000
*Includes a $5.5 million CalPERS stability designation
**Per Council Policy No. 74, this balance needs to be a minimum of 30% of
prior year’s GF adopted expenditure budget with a target range of 40%-50%.
GENERAL FUND RESERVES (REVISED POLICY)
Fund Balance Reserves at June 30, 2018
Non-spendable $51,627,000
Assigned *43,855,000
Emergency/Catastrophic**36,435,200
Economic Uncertainty**15,348,064 $84,485,000
Unassigned**32,701,736
Total General Fund Reserves $179,967,000
*Includes a $5.5 million CalPERS stability designation
**Per revised Council Policy No. 74, these balances need to be a minimum of
30% of prior year’s GF adopted expenditure budget.
RECOMMENDED ACTION
•Adopt a Resolution approving City Council Policy No. 86 to establish a Pension Funding Policy, approving City Council Policy No. 87 to establish a General Fund Surplus Policy, and revising City Council Policy No. 74, General Fund Reserve Policy.
Thank you
ALTERNATIVE ACTION
Payment to CalPERS for $12.2M to reduce unfunded liability (both plans) using one-time funds from:
GF excess reserves -$ 10M
Pension set-aside -$ 2.2M
Using all assumption data we know today, making this one-time payment of $12.2M will yield approximately:
$6.2M in interest savings over the next 14 years
$1.4M in annual pension cost savings beginning in FY 20-21, growing 3% per year thereafter
Projected to increase the city’s combined pension funding status to over 77%
ALTERNATIVE ACTION
Payment to CalPERS for $17.3M to reduce unfunded liability (both plans) using one-time funds from:
GF excess reserves -$ 10M
Pension set-aside -$ 5.5M
FY 2018-19 budget surplus -$ 1.8M
Using all assumption data we know today, making this one-time payment of $17.3M will yield approximately:
$9.5M in interest savings over the next 17 years
$1.9M in annual pension cost savings beginning in FY 20-21, growing 3% per year thereafter
Projected to increase the city’s combined pension funding status to approximately 78%